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    OSFI Updates Rules to Implement Final Basel III Reforms in Canada

    January 31, 2022

    The Office of the Superintendent of Financial Institutions (OSFI) updated the guidelines on capital adequacy requirements, leverage requirements, liquidity adequacy requirements, capital and liquidity requirements for Small and Medium-Sized Deposit-Taking Institutions (SMSBs), and Pillar 3 disclosure requirements for domestic systemically important banks (D-SIBs) and SMSBs. The guidelines on Capital Adequacy Requirements (other than chapters on credit valuation adjustment risk and market risk), leverage requirements, SMSBs, and Pillar 3 will be effective from the second fiscal quarter of 2023 while the revised credit valuation adjustment risk and the market risk chapters of the Capital Adequacy Requirements guideline will be effective from first fiscal quarter of 2024. Additionally, the revised Liquidity Adequacy Requirements Guideline will be implemented as of April 01, 2023. To complement the revised guidelines, OSFI is finalizing corresponding changes to the related regulatory returns, which will be published in February 2022.

    The OSFI letter addressed to banking sector entities indicates that the updated rules incorporate the final Basel III banking reforms with additional adjustments to make them suitable for federally regulated deposit-taking institutions. The Annexes to the letter provide non-attributed summaries of the comments received from stakeholders during public consultations on the guidelines in Spring 2021 and an explanation of whether the comments resulted in revisions. The primary changes that have been incorporated in the Capital Adequacy Requirements Guideline include:

    • Clarification of supervisory capital targets for deposit-taking institutions, including interactions with capital buffers (Chapter 1)
    • Implementation of a 72.5% Basel III output floor to be phased in over three years commencing in second fiscal quarter of 2023 (Chapter 1)
    • Introduction of new deductions from common equity tier 1 capital for certain exposures formerly subject to a 1250% risk-weight, and reverse mortgages with loan-to-value ratios greater than 80% (Chapter 2)
    • Introduction of new operational risk capital rules through the domestic implementation of the Basel III standardized approach for operational risk and a new simplified standardized approach available for SMSBs (Chapter 3)
    • Maintenance of the current capital treatment for general residential real estate exposures with loan-to-value ratios between 70% and 80% (Chapter 4)
    • Reduction of credit risk capital requirements for certain qualifying revolving retail exposures, incorporation of updates to the capital treatment of privately insured mortgages, and introduction of a capital treatment for residential real estate exposures that do not meet expectations of OSFI related to Guideline B-20 on residential mortgage underwriting practices and procedures (Chapters 4 and 5)
    • Elimination of the 1.06 internal ratings-based scaling factor initially implemented as part of the transition from Basel I to Basel II (Chapter 5)
    • Implementation of the revised market risk capital rules, consistent with the fundamental review of the trading book of Basel Committee on Banking Supervision, as well as the revised credit valuation adjustment, or CVA, framework (Chapters 8 and 9)

    Below are the key updates with respect to the other guidelines:

    • Leverage Requirements Guideline. Application of a leverage ratio buffer to D-SIBs; changes to the leverage requirements (for example, the treatment of securities financing transactions and the treatment of off-balance sheet items) to align with revisions to the Capital Adequacy Requirements Guideline
    • Liquidity Adequacy Requirements Guideline. Enhancements to Net Cumulative Cash Flow (NCCF) requirements to improve the recognition of cash flows related to asset growth (Chapter 4); reduction of the time to report NCCF to OSFI for non-D-SIBs and clarifications of the time to report NCCF to OSFI for all institutions during periods of stress
    • SMSBs Capital and Liquidity Requirements Guideline. Key features of this new guideline include criteria to segment SMSBs into different categories for the purposes of determining capital and liquidity requirements; separate sections for each category of SMSBs that describe the applicable capital and liquidity requirements and references to the relevant sections of the Capital Adequacy Requirements, Leverage Requirements, and Liquidity Adequacy Requirements Guidelines
    • Pillar 3 Disclosure Requirements Guideline. Issuance of separate Pillar 3 Disclosure Guidelines for D-SIBs and SMSBs; incorporation of the complete set of disclosures from the Basel Framework for D-SIBs; and clearer and more proportional disclosure requirements for SMSBs


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    Keywords: Americas, Canada, Banking, Basel, Regulatory Capital, Credit Risk, Market Risk, Operational Risk, Pillar 3, Output Floor, CVA Risk, Disclosures, Reporting, SMSBs, Headline, FRTB, OSFI

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